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Defense Department May Update Military Lending Act

hundred dollar bill on uniform
The Secretary of Defense and the Defense Department are pondering an update to the Military Lending Act in the wake of the lending industry’s growth and the increased availability of financial products, such as auto loans, installment loans and car title loans.

While the Department of Defense has not officially commented on whether it will change the MLA, which was created nearly ten years ago in 2006, the fact that predatory lending remains a threat to members of the military means that looming changes are worth considering.

The MLA stipulates that members of the Armed Forces cannot borrow certain types of loans, such as payday loans, that are above acceptable interest rate caps, and that lenders cannot offer services in close proximity to military bases.

Hank Coleman, an Active Duty Army Major and Founder of Money Q&A, said that in his years in the service he has seen a clear need for the MLA to be expanded.

“I have seen countless times, my soldiers who are taken advantage of by unscrupulous car dealers outside the gates of the military base and charge huge interest rates,” he said. “The Military lending Act should be extended to cover car loans, title loans, and tax refund loans.”

Soldiers, often in their late teens or early twenties, are not as financially savvy as most customers that lenders seek. This is compounded by the fact that most members of the Armed Forces are not college educated. As a result, predatory lenders provide loans, such as payday loans, to members of the military while charging them higher than average interest rates.

Members of the military may not even recognize they are being preyed upon since for many of them, the service is their first job out of high school. It’s often their first time away from home, family, and friends, not to mention the first time they have their own money in their pockets. Without a support network of nearby friends and family offering a second pair of eyes on a loved one’s finances, it is easier for enlisted service members to unknowingly assume they have a normal interest rate on an auto loan, payday loan or other debt.

“It is not uncommon for soldiers to buy cars with 18 percent or higher annual interest rates,” said Coleman.

Despite having access to government-paid health care, food and housing, members of the military still receive relatively low amounts of pay. As a result, a portion of them turn to lenders to compensate.

“The typical private straight out of basic training only earns $1,516 per month in salary before taxes,” said Coleman. “There are still a lot of expenses in a young person’s budget that have to be paid from that amount. These monthly expenses will only increase if that young private has a family to support on that paycheck as well.”

What also attracts many predatory lenders is the fact that members of the military have a predictable and regular paycheck. Unlike civilians, members of the military cannot simply be fired at whim or face sudden job termination, barring court martial or some type of discharge. As a result, predatory lenders see them as a type of stable consumer to be taken advantage of.

Unfortunately, a member of the Armed Forces doesn’t have to walk into a predatory retail auto or payday loan lender in order to be preyed upon.

Dianne Langston, a Real Estate Broker and Board Member of the US Military Veteran Family Resource Center, said that telemarketers often use bait and switch tactics to get unwitting customers, including enlisted personnel, to get off fixed-rate loans. If the Military Lending Act were expanded to protect members of the military from telemarketers and their high-pressure sales tactics, then fewer borrowers would be victimized.

Lenders profit from members of the military who leave the predictability of fixed interest rates for variable ones since variable rates can increase over time and bring in more money.

Once members of the military leave the service, they do not suddenly become financially proficient either.

“It is difficult for most veterans to understand lending terms and to read complex disclosures that take reams of paper,” said Langston.

This lack of financial training can end up impacting more than just members of the military themselves. Their families can have their lives shaped by financial decisions just as easily — especially if the member of the family in the military is the sole bread winner.

“I would expand the Act to cover disabled veterans and their spouses,” said Langston. “Anytime a veteran suffers, so does the family.”